This year, you have managed to save more than you usually do. It is by no means a small achievement. Like this column mentioned earlier, you can build on this achievement in the New Year. Investing starts when you consistently manage to save each month. The direction of your investments provide the necessary equity or debt capital that entrepreneurs and businesses need to expand. And jobs help in the consumption needed for growth.
Increasingly, a lot of smart investors are looking for ‘good’ reasons to invest. A few weeks ago, Ashok Kumar, a fellow columnist on this page, wrote about the rush for Environmental, Social and Governance, or ESG, funds. He rightly said that ESG investing translates into sustainable and socially responsible investments. As an investor, you may like to back businesses that follow such policies. A lot of domestic mutual funds are rushing with thematic funds that allow investors to do ESG investing.
Before you jump into that, the policy around reporting on ESG policies by businesses are evolving. There are no standard rules on the way that companies would disclose their strategy towards the environment, sustainability, and governance. The latest Reserve Bank of India annual report has a box item on the topic. It explains that the ESG factors ascertain the long-term sustainability of firms in the face of environmental vulnerabilities. These include climate change risks. It mainly dwells on aspects like rising insurance claims due to a surge in natural disasters and assets going bad for borrowers. The financial system is vulnerable as a result.
The RBI calls for an appropriate global framework to identify, assess, and manage financial risks arising out of climate risk. But businesses are already talking about it in their annual reports. Hindustan Unilever mentions the word ‘sustainability’ 30 times in its latest annual report. ICICI Bank mentions ‘ESG’ at least eight times. Most big businesses are steadily devising ESG strategies at the Board level to ensure that they continue to remain attractive to investors.
Who invests in these funds?
Large pension funds and family offices have begun to look at ESG investing actively. According to global bank UBS’ family office report for 2020 released earlier this year, the share of ESG investing is likely to be 35 per cent of overall assets under management. Family offices are a set up where rich people create professional fund-management teams. “ESG integration is catching up, as families look to more than double their allocations to 19 per cent, from 9 per cent today,” the UBS report said.
Global Family Offices manage $10 trillion in assets and invest around the world in multiple asset classes like real estate, commodity, stock markets, art, and other valuables. Successful people like Infosys founder N R Narayan Murthy, for instance, have set up family offices that manage their family fortune. Pension funds around the world manage close to $20 trillion in assets. As more and more institutional investors put ESG as criteria for investing, that could encourage businesses to become more responsible. Many of these investors are activists, and they get companies to do the right thing.
Stock exchanges have also created indices that include companies meeting the ESG criteria. The MSCI Emerging Market ESG index has consistently done better than the standard MSCI Emerging Market index. “ESG funds globally as well as in India have outperformed in the recent Covid-19 pandemic induced fall and subsequent recovery,” observes stockbroking firm ICICI Securities. In the future, investors are increasingly likely to evaluate businesses based on their commitment to the environment, social and governance rules.
It is important to note that India is a signatory to the Paris Climate Change Agreement. India wants to reduce carbon emissions to a third below 2005 levels. The country is also committed to generating 40 per cent of its electricity through non-conventional energy sources. In India, nearly half of the emissions are due to coal-based thermal power generation plants and companies in the cement sectors.
Take state-owned National Thermal Power Corporation, India’s largest thermal power producer making 62,000 Megawatts of power each year. The company has committed to generate 30 per cent of that capacity through non-conventional means by 2030, according to one report by CLSA, a foreign securities firm. The company has also decided not to buy new land for coal plants. And it has outperformed the Nifty index since the announcement a month ago.
(The author is editor-in-chief at www.moneyminute.in)